Happy Thursday to you from a lovely Asti!
"What's mine is mine, and what's yours is mine!" is a fun little reminder my mother used to lob at my father.
I remember bristling at it when I was a kid, not because my mother was in any way mean-spirited about it or even because my father was resigned to it. But as an only child, that meant I'd have to share one day.
To this day, I buy my wife a separate popcorn not that we ever go to the movies anymore and separate gelato when taking our passeggiata. Micah is the only person who ever (just ask my ex-girlfriends) gets a free share, and that's because I feel like I'm giving it to my younger self.
Petty personal preferences aside, it leads me to a big problem I have with a practice we'll discuss today...
Stakeholder capitalism.
The system that allows non-owners to impose extraneous costs on the actual owners of a corporation.
But I've gone ahead of myself.
Let's start with the definition of the term.
Stakeholder capitalism is an economic approach that emphasizes the importance of considering the interests of all stakeholders involved in a business or organization beyond just the shareholders.
Traditionally, capitalism’s primary focus has been maximizing shareholder value, where the primary goal is to generate profits and increase the value of shares for the shareholders.
However, stakeholder capitalism takes a broader view. It recognizes that businesses are responsible for considering the well-being of various stakeholders, such as employees, customers, suppliers, local communities and the environment. It acknowledges that these stakeholders also contribute to the success and sustainability of a company and should be taken into account when making business decisions.
Under stakeholder capitalism, companies aim to create long-term value by addressing the needs and concerns of all stakeholders. This can involve fair treatment of employees, providing quality products or services to customers, fostering strong relationships with suppliers, being socially responsible in the community and adopting sustainable practices to protect the environment.
Stakeholder capitalism promotes a more balanced and inclusive approach to economic growth, where shareholders’ interests are considered alongside other stakeholders’ well-being. The goal is to create a more sustainable and equitable form of capitalism that benefits shareholders and the broader society.
My problem with the entire edifice is that the market usually corrects for companies’ indiscretions like employee or client mistreatment.
Of course, that doesn't happen all the time.
Let's take that son-of-a-bitch Jack Welch for example...
He utterly destroyed the Hudson River and its ecosystem for generations. Nothing ever happened to him.
Why?
Because he was "too powerful." And he "settled out of court."
But really, the EPA was toothless, and the New York State government was useless.
Never rely on the government to protect the environment. Just ask the Russians where the Aral Sea is if you need proof.
Unfortunately, Environmental, Social, and Governance (ESG) investing is just one of the cancerous outgrowths of stakeholder capitalism.
Let's try to remain dispassionate and lay out SC’s lovely and lousy.
Inclusive decision-making: Stakeholder capitalism allows for a more inclusive decision-making process by considering the perspectives and interests of various stakeholders. This can lead to better-informed and more balanced decisions considering the broader impact of business actions. I have no problem with this, as long as it's unofficial.
Long-term sustainability: By considering the interests of all stakeholders, stakeholder capitalism promotes the long-term sustainability of businesses. This approach encourages companies to focus on environmental sustainability, social responsibility and ethical practices, which can enhance their reputation and mitigate risks in the long run. Again, the market would ultimately correct bad behavior anyway.
Enhanced reputation and brand value: Embracing stakeholder capitalism can improve a company’s reputation and brand value. Consumers, employees, and investors increasingly prefer companies committed to social and environmental causes, leading to increased customer loyalty, employee satisfaction and investor confidence. Unfortunately, many people who'd approve neither buy the company's products nor own its stock.
Resilience to crisis: Companies prioritizing stakeholder interests are often better equipped to navigate and recover from crises. By maintaining positive relationships with employees, customers, and communities, businesses are more likely to receive support and cooperation during challenging times. This is common sense.
Cons of Stakeholder Capitalism:
Complexity in decision-making: Taking into account the interests of multiple stakeholders can make decision-making more complex and time-consuming. Balancing competing demands and priorities may require extensive deliberation, potentially slowing the decision-making process. You can't make everyone happy. It's that simple.
Potential conflicts of interest: Different stakeholders may have conflicting interests, making it challenging to satisfy everyone simultaneously. Balancing the needs of shareholders with those of other stakeholders can sometimes lead to tensions or compromises that may only partially satisfy some groups. This is why you shouldn't even try to keep everyone happy.
Short-term profitability concerns: Critics argue that stakeholder capitalism may place less emphasis on short-term profitability and shareholder returns, potentially impacting the financial performance of businesses. This concern arises from the belief that prioritizing stakeholders other than shareholders could divert resources and attention away from maximizing profits. DEI (Diversity, Equity, and Inclusion) and ESG are two enormous wastes of capital.
Lack of clarity and measurement: Determining different stakeholders’ specific interests and priorities can be subjective and difficult to quantify. Without clear metrics or guidelines, measuring the success of stakeholder capitalism initiatives and tracking progress may be challenging. Again, this is one reason companies shouldn't try to make this official business.
Allegedly, stakeholder capitalism doesn't necessarily conflict with the concept of private property and ownership. In fact, private property and ownership rights are fundamental pillars of capitalism, including stakeholder capitalism.
Instead, stakeholder capitalism expands the perspective of capitalism by recognizing that businesses operate within a broader societal context and have responsibilities beyond maximizing shareholder wealth. It acknowledges that companies rely on various stakeholders and resources to function effectively and sustainably.
While private property rights allow individuals or entities to own and control assets, stakeholder capitalism emphasizes that exercising those rights should consider the interests of all stakeholders involved. It advocates for a more inclusive and balanced approach to decision-making, where the impact on employees, customers, communities and the environment is taken into account alongside the rights of property owners.
Unfortunately, none of those participants other than shareholders (the property owners) pay for that privilege.
Stakeholder capitalism calls for responsible and accountable management of a firm's assets. It suggests that businesses should consider their actions’ social, environmental, and economic consequences, even as they continue to exercise their ownership rights.
I don't know a single company that doesn't. I'm not saying they always get it right. But that's where the market comes in and corrects the company via a reduction in its share price.
In essence, stakeholder capitalism wants to align private property owners’ interests with society’s broader interests (whatever they are). It's supposedly a more nuanced and inclusive interpretation of capitalism.
Stakeholder capitalism advocates the inclusion of various stakeholders in decision-making processes. Still, it does not necessarily imply that individuals who don't own companies have direct control over how those companies are run.
I'd argue the above paragraph is incorrect. Just ask Larry Fink of BlackRock, who's currently trying to force behaviors. Larry has forgotten he's only the fiduciary custodian of our funds' assets, not the owner of them.
In a traditional capitalist model, where the focus is solely on maximizing shareholder value, the decisions and actions of a company are primarily driven by the owners and shareholders.
However, stakeholder capitalism argues that companies should consider the interests of all stakeholders, even if they don’t have a legal right to influence decision-making.
The goal is to ensure that business decisions reflect broader perspectives and consider the potential impact on stakeholders.
And yet, the honest answer to the question I posed above is "absolutely none whatsoever."
A non-owner should never have a say in how a firm is run. That's what the owners are for. That's why owners pay for their shares. As Robert Heinlein wrote, "TANSTAAFL."
There ain't no such thing as a free lunch.
And that's just what non-owning stakeholders want: a free lunch.
But here's what I say to traditional stakeholders:
Employees: Don't like what the boss is doing? Quit and work for someone else. Or better, yourself.Clients: Don't like what the company is doing? Stop buying the products.Townsfolk: The company is polluting your town? Sue their asses off.But if you're in love with the company and want to push it in a different direction, talk to the boss. Talk to management. Talk to your line manager.
These days, most companies go out of their way to listen to their employees, clients, and other stakeholders.
It's cheaper than dealing with a boycott. Just ask Bud Light.
Think the Tinder guys wish they treated Whitney Wolfe Herd better? After they were done harassing her, she founded Bumble and is worth over a half billion dollars.
Squeeze your suppliers too hard? They go out of business, and companies like GM cry poverty. (GM is chock full of pricks. I'll never buy their cars.)
The market will correct. It always does when left to its devices.
The bottom line is this: stakeholder capitalism is a monster that Klaus Schwab invented to get into boardrooms without paying the entry fee.
Stakeholders are shareholders without shares.
Sure, they've got concerns.
But that's where good negotiation skills come in handy. Oh, and a big stick.
Capitalism works fine when it's not interfered with. Because, like with karma, what goes around will surely come around.
What do you think? Let me know what you think by emailing me here.
The Daily Reckoning